Question: You have the following information related to Chalmers Corporation's pension plan:
1. Defined benefit, noncontributory pension plan.
2. Plan initiation, January 1, 2014 (no credit given for prior service).
3. Retirement benefits paid at year-end with the first payment one year after retirement.
4. Assumed discount rate of 7%.
5. Assumed expected rate of return on plan assets of 9%.
6. Annual retirement benefit equals years of credited service 3 0.02 3 highest salary. You have the following information for Frank Bullitt, the firm's only employee:
Start date January 1, 2011
Expected retirement date December 31, 2028
Expected number of payments during retirement 20
Selected actual and expected salary levels
Required: 1. Calculate the service cost and the interest cost components of pension cost for 2014 and 2015.
2. Calculate the PBO at the end of 2014 and 2015.
3. Compute the fair value of plan assets for 2014 and 2015, assuming that $1,200 in contributions is made to the pension fund at the end of each year. There were no actuarial gains or losses during 2014 or 2015.
4. Calculate pension expense for 2014 and 2015.
5. Prepare the required journal entries for 2014 and 2015.
6. Show how your answer for 2014 would change if the plan had granted credit for prior service.